Pennsylvania Real Estate Investment Trust (PEI) 2003 Q4 法說會逐字稿

Good day, everyone, and welcome to today's Pennsylvania Real Estate Investment Trust fourth-quarter earnings conference call. Today's conference is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Evan Smith. Please go ahead, sir.

Thank you. Thank you everyone for joining us for PREIT's fourth-quarter and year-end 2003 earnings conference call. Before we begin, I would like everyone to know that this conference call contains certain forward-looking statements within the meaning of section 21(e) of the Securities Exchange Act of 1934 and U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends, and other matters that are not historical facts. These forward-looking statements reflect PREIT's current views about future events and are subject to risks, uncertainties, assumptions, and changes in circumstances that may cause future events, achievements, or results to differ materially from those expressed by forward-looking statements. PREIT's business is subject to uncertainties regarding the revenues, operating expenses, leasing activities, occupancy rates, and other competitor factors relating to PREIT's portfolio and changes in local market conditions, as well as general, economic, financial, and political conditions, including the possibility of outbreak or escalation of war or terrorist attack, any of which may cause future events, achievements, or results to differ materially from those expressed by forward-looking statements. PREIT does not intend to, and disclaims any duty or obligation to, update or revise any forward-looking statements or industry information set forth in this conference call to reflect new information, future events or otherwise.

With nothing more, I'd like now to turn the floor over to Mr. Ron Rubin, Chairman and Chief Executive Officer of Pennsylvania Real Estate Investment Trust. Ron, the floor is yours.

Thank you very much. Good morning, everyone. I appreciate the fact that you're joining us today for fiscal 2004 fourth-quarter and year-end conference call. Participating in the call with me today are Jon Weller, President and Chief Operating Officer of the company, and Ed Glickman, Executive Vice President and Chief Financial Officer of the company. In addition, other senior officers who are in the room, although not participating in the call, but who are available for your questions are George Rubin, President of PREIT Services; Joe Coradino, Executive VP in charge of retail operations; Dave Bryant, Treasurer of the company; and Bruce Goldman, General Counsel.

In 2003, PREIT executed several key transactions which have transformed the company into one of the largest mall REITs in the United States, with a total capitalization in excess of $3 billion. Our portfolio now stands at 54 retail properties, including 40 shopping malls and 14 strip and power centers. As the largest retail mall owners in the Philadelphia region, which is the fourth largest retail market in the United States, we are confident that our expanded portfolio will offer many more opportunities for existing and new retailers as well as our shareholders and our employees.

Early in 2004, we announced the creation of a 5-person office of the chairman that will take effect on or before March 15. We believe this structure will enable us to maximize the talent and experience of our management team and effectively support our future growth.

I would also like to state that the company has successfully resolved all matters with the Internal Revenue Service pertaining to its REIT status. On February 9, we received a private letter ruling from the IRS which allows PREIT to make a retroactive taxable REIT subsidiary election with respect to a company in which PREIT owns more than a 10 percent interest. We are pleased that the matter has been resolved favorably and that the company's REIT status is not in question.

In 2003, we expanded our portfolio through strategic transactions which will improve the company's operating leverage and financial resources to deliver improved results and greater value to our shareholders in 2004. I'm now going to turn the call over to Jon Weller, and he'll be followed by Ed Glickman. Jon?

Thanks, Ron, and good morning, everyone. In the fourth quarter of 2003, net income increased to $11.5 million compared to 7.3 million in the fourth quarter of 2002. Results for the fourth quarter of 2003 included the $4.5 million gain on the sale of Countrywood Apartments in Tampa, Florida.

On a per-share basis, net income was 40 cents compared with 45 cents in the prior year. Weighted average shares of beneficial interest outstanding in the current quarter were 28.8 million compared with 16.5 million in the prior year. The per-share information was affected by the increase of weighted average shares outstanding primarily due to the 6.3 million common shares issued in connection with the company's public offering in August 2003 and the 11.7 million common shares and 1.7 million operating partnership units issued with respect to the merger with Crown American Realty Trust.

FFO for the fourth quarter of 2003 increased by 68.4 percent to $26.2 million, over 15.6 million in the comparable period in 2002, reflecting the impact of the Rouse malls acquisition, the acquisition of the remaining 70 percent of Willow Grove Park, and the closing of the merger with Crown. FFO per share was 83 cents, reflecting the dilutive effect of the equity offering completed in the third quarter and the expensing of $5.9 million of costs primary related to the closing of the merger.

Fourth-quarter 2003 NOI increased by 167.5 percent to 55.6 million from 20.8 million in the fourth quarter of 2002. For the retail portfolio, same-store revenues increased 3.5 percent and same-store NOI increased (ph) 1.7 percent in the 2003 fourth quarter.

On a same-store basis, occupancy in the company's retail portfolio increased to 95.4 percent, 60 basis points higher than the 94.8 percent occupancy rates in the fourth quarter of 2002. The company's same-store mall (indiscernible) properties reported sales of $379 per square foot in the trailing 12 months ended December 31, 2003, as compared with $381 per square foot in the comparable period ended December 31, 2002.

Since same-store retail properties represent only 26 percent of retail on our lines (ph), it's more meaningful to look at statistics on the overall retail portfolio, consisting of 54 properties, including 40 malls. The mall portfolio has a total occupancy of 90.5 percent as of December 31, 2003, and in-line (ph) space in the malls is 87.4 percent occupied. Power and strip centers are 97.9 percent and 94.8 percent occupied, respectively, at December 31, '03. These occupancy figures are in line with our expectations, and reflect the consolidation of the Crown portfolio using PREIT's policies, which do not include in occupancy leases for one year or less. Average sales per square foot were $305 for the 40-mall portfolio as of December 31, '03 -- also in line with our expectations.

During the 2003 fourth quarter, the company executed 81 new and renewal (ph) leases covering the 175,118 square feet at (indiscernible) per square foot of $23.64. For the year, the company completed 175 leases encompassing 658,000 square feet at an average rent of $17.14 per foot.

Our business plan for 2004 assumes approximately $25 million of capital expenditures, including $10 million for improvements and $15 million related to leasing. These estimates do not include the cost for anchor tenants or major renovations, and also do not include approximately $16 million anticipated to be spent in 2004 to complete the redevelopment of Prince George's Plaza and Magnolia Mall.

The company is engaged in discussions with a number of anchor tenant prospects for centers recently acquired, and intends to announce transactions when definitive agreements are executed. At that time, the company will provide details of the transaction along with the estimated cost to complete any renovations required to accommodate the tenant.

Before turning the call over to Ed Glickman, I want to address the steps we are taking to prevent a future problem similar to the TRS election, which was detected and resolved earlier this month. With the assistance of our corporate counsel and tax adviser, the company has completed a review of its corporate structure, and can confirm that all filings necessary to maintain PREIT's status as a REIT have been made. Further, the company is strengthening its internal controls and procedures, both internally and for outside counsel when new entities are formed in connection with acquisitions, financings, and other activities. Also, the company audit committee will select independent outside advisers to review these procedures.

I'd now like to turn the call over to Ed Glickman.

Thanks, John. PREIT's transformation during 2003 brought substantial changes to the balance sheet. The company ended the year with investments in real estate of 2.54 billion, an increase of 100 -- I'm sorry, of 1.59 billion, or 167 percent over 2002's year-end balance of 953 million. Specifically in the retail sector, investment in real estate was up 1.9 billion to 2.52 billion, representing a 307 percent increase in retail investment over last year's balance of 620 million.

The dramatic rise in book investment has come primarily from acquisitions during the year, including the Crown American Mall portfolio for 1.22 billion; six regional malls from the Rouse Company, 540 million; and our partner (ph) 70 percent interest in Willow Grove, 116 million. The remainder consists of spending on a number of small projects and $12 million of completed projects that were previously classified as development.

At the end of 2003 the company's investment in development projects had fallen to 21.7 million from 24.8 million at the end of 2002. The 3.1 million decrease in development was the net of 11.4 million of new investments, PGP (ph), Dartmouth and Magnolia malls, the $2.9 million effect of a parcel sale at Crest Plaza, and the previously mentioned 11.6 million of completed retail properties that were placed into service. The completion of PREIT's multifamily disposition strategy caused a reduction in multifamily investment of 305.4 million from last year's balance, which (indiscernible) request (ph) the full amount of the prior-year multifamily investment on the balance sheet, which is now reduced to zero. As a result of the above changes, the company has successfully transformed its portfolio as planned and is now substantially concentrated in the retail sector.

On the right side of the balance sheet, the company finished the year with debt capital of 1.57 billion, inclusive of 75.4 million of mortgage debt premium, up from 617 million at the end of 2002. The adjustment is primarily attributed to the mortgages assumed with the Rouse and Brown (ph) portfolios. Also contributing to the change, however, is the net debt increase from the refinancing of the Dartmouth and Moorestown mall, 93 million, and reductions occurring from the sale of the multifamily portfolio. With favorable interest rates and ample credit availability for retail asset purchases, the company remains biased towards long-term, fixed-rate financing. The net of debt premium adjustments, the 1.49 billion of total mortgages outstanding at the end of the year, included 1.29 billion, or 87 percent, of long-term, fixed-rate mortgage debt with a weighted average interest rate of 7.2 percent and an average maturity of 5.25 years. The remaining 200 million, or 13 percent, is attributable to a $30 million floating-rate loan on Wiregrass Commons Mall and 170 million that is drawn against the companies $500 million line of credit at 200 basis points over LIBOR.

Since the end of 2002, PREIT's equity markets cap, including preferred, has increased by 223 percent, from 479 million to 1.48 billion. The rise in equity cap was the result of the issuance of approximately 20.8 million new shares in OP units resulting from the merger with Crown American and the $184 million equity offering completed in August. Adding to the increase was 39.6 percent appreciation in share value, from $26 to $36.30 during 2003.

The timing and cost of the merger with Crown were in line with our expectations, and we have begun the year as a merged company. PREIT is therefore reaffirming its guidance at FFO for the calendar year 2004 will be between $3.62 and $3.82 per share. Additionally, the company estimates that funds from operations for the first quarter of 2004 will be between 81 cents and 89 cents per share.

We're pleased at the state of PREIT's balance sheet at the end of 2003. Notwithstanding this year's substantial growth, the company was able to reduce its debt to market cap to 50.3 percent from 56.3 percent at the end of 2002. This historically low leverage, combined with the borrowing capacity that our unsecured line of credit allows us, position the company to pursue strategic opportunities at (indiscernible). We're confident that the company has situated itself with sufficient liquidity to meet both its operational investment goals for the coming year and has the ability to obtain capital, should we require it. Ron, Jon, and I will answer any questions that you may have at this time.

(OPERATOR INSTRUCTIONS) David Fick, Legg Mason.

Good morning, I was wondering if I could follow-up on Ed's comment on the capital availability. Obviously, you had a little bit of a hitch. But as you said at the time, your attempted equity raise was more opportunistic than anything. What are you now thinking about that? Obviously, it will probably impact your share performance until you get that behind you.

Dave, I think now that we've released our earnings, we'll look at the various options that could be available to us. I don't think we have any definitive plans to announce at this time. But clearly, we are always looking at opportunities, and I think we'll continue to do so.

The restructuring charge was below your guidance. Should we expect some additional charge in the first quarter?

In the first quarter, we will have -- and it's in the numbers that we just gave out, the guidance we just gave out -- we'll have some costs related to transitional workers. And that will probably continue a little bit into the second quarter, as well.

Would that be between 1.5 million and 2 million -- in that range?

I think, Dave, that those were always anticipated in our cost. And it just turned out that the total amount that we needed to expense in the fourth quarter was a little bit less than we had originally expected.

Okay --

Dave, one thing that -- an implication of that is that the 81 to 89 cents -- you have to look at the seasonality of that. Our first quarter is usually a higher quarter. So -- and this year, it's probably going to be more in line with the other quarters than it would be without those transitional charges.

Can you talk little bit about what you have found as you've been analyzing the Crown properties in terms of CapEx requirements, you know, lease-up opportunities in that portfolio, and sort of the overall asset management plan there?

Dave, it's Jon. As we indicated, the total portfolio -- the CapEx requirements in our plan are 10 million for 2004. Some of that was expected based on plans that may have emanated from refinancing -- that's both within the Crown portfolio and within the PREIT portfolio. And so in many cases, there were amounts that were set aside when financings were put in place, or there were specific time frames for specific capital improvements.

As we have indicated before, we've analyzed the entire portfolio, including the 32 new assets, on a lease-by-lease basis. And our leasing plan has 15 million of anticipated expenses during the year related to re-leasing of existing spaces and vacant space, according to the expected results that our leasing team or asset management teams have assembled. So as I indicated in my remarks, those plans do not include major or anchor tenants assumptions, which we're working on individually. And as those transactions mature, if they do, we'll be back to you with the specific cost associated with that.

Now what is implied in those CapEx numbers in terms of expected year-end occupancy for the Crown portfolio?

We haven't broken it out specifically like that. So we'd have to do some further analysis and get back to you on that.

Okay, so you're really treating Crown as though it's part of your core portfolio now. You're not going to be analyzing it separately?

No, in the model that we have, it's not analyzed separately. All the malls are together. It's one company. And in essence, as Jon was saying, we built the plan off of individual plans for each of the properties. And the numbers he just gave you is additive to the entire portfolio. It's not our intention to treat either the former Rouse assets or the former Crown assets as separate entities.

Have you had any material surprises in terms of lease administration as you've been putting these things into your systems? Cam (ph), allocations, recovery, things like that -- anything that popped up?

No, just that it's been an incredible amount of work. And especially with the new accounting treatment for the individual -- having to go through each of the leases individually. It's been an amazing amount of work. But we're making significant progress and it's been going well.

My last question is -- we've seen a couple of the mall companies with sort of the $300 to $320 sales profiles talk a lot about concerns in the toy area, the books and music categories. And I wonder what you're assuming? Are you making global assumptions there, or is it simply a lease-by-lease? Is there a cushion factor that you perhaps considered?

We can talk specifically about K-B Toys, Dave, that it's on our list of top 20 tenants. We have 41 stores. They've announced some closings -- seven of them in our properties. They represent altogether 1.28 percent of the base rent in the company. We will be addressing each of those store closings as they come up, or may not -- depending on the center, it may or may not involve replacement of a lifetime tenant. We monitor that -- the bookstores, the music stores, obviously very closely.

I guess my question is, what are you assuming? Are you assuming that you're going to lose those seven stores? Have you put in sort of a factor assuming there's going to be some more that come back? You know, not necessarily just K-B, but sort of a generic re-leasing that you're going to have to do?

I mean, effectively that -- it's built into your assumptions in terms of the timeframe you assume it takes to lease space and the probability factors that a tenant renews. I mean, all of that accounts for some slippage and surprises, which you know -- K-B Toys filing, or anybody else who might who file that is a tenant in our portfolio -- I mean, essentially, it's built into our overall projections that we'll have some slippage.

Dave, you know, this is our business. And we are a landlord. And we do have retail tenants that from time to time do unravel. And we will in most cases, we feel, be able to re-lease that space. In some cases, at better rents than we are receiving from the present tenants. And so the question is really from our analysis is what's the downtime going to be? It's not a question of whether we'll be able to re-lease the space. We feel that our properties are good and strong, and that we will be able to, in most cases, re-lease that space when it comes available.

I understand that. And I was just trying to get a sense of style. A couple of your peers have acted surprised about what's going on with the toy space, and didn't seem to have planned it into their numbers. I'm just trying to get a sense of how much you're leaving sort of on the table for unexpected surprises. But you've answered the question. Thanks a lot.

(OPERATOR INSTRUCTIONS) Alexander Goldfarb, Lehman Brothers.

First, if you can just go over your guidance -- if you can just refresh us what share count the guidance is predicated on?

Yes, we're going to be issuing a supplemental. And you will see the weighted average shares are out there (ph) -- I will give you the closing numbers for the year.

Including OPs, obviously -- and then also, any new shares that would come in -- I think there's some Christiana --

Let me give you the year-end number -- 39,229,491. That's the year-end. Including '03 -- I'm sorry, including OP units of 3,685,226. The shares outstanding -- 35,544,265. And this will be -- the share counts are on page 4 of the supplemental.

Okay, great. And then in the guidance that you gave, there is no share issuance assumed in that -- correct?

Not in the guidance that we gave.

Okay. And how does the sale of the six Crown assets affect the guidance?

It's not in the guidance.

Okay, not in the guidance -- great. And what is the -- for the rent, the FAS 141, and for the debt premiums -- can you just go over what the '04 and '05 of those two line items will be?

No -- actually, I can walk you through some of this off-line. But let's just say that the total intangibles on the books are about $140 million as a result of 141, and the debt premiums -- I think I mentioned it in my remarks -- is a total of 75.4 million.

And that sort of burns off into '05, correct.

No, actually, there's different components of the debt premium. The debt premium -- some of it's related to a couple of mortgages that have early terms. But part of it's related to the Crown Remick (ph), which is definitely more than a couple of years. So I think there's debt premium that comes from Cherry Hill, there's debt premium that comes from the Exton, there's debt premium that comes from the Crown Remick. And if you want to get this broken down for you, it's on page 16 of the supplemental.

And that will just be -- but then off-line, I can get from you the per-share impact in '04 and '05 for both those line items?

Well, actually, we're not giving that number out separately, but what you can do -- there's a maturity schedule and the amount of debt premium on each particular property laid out.

Okay. And on the FAS 141, can I just sort of amortize that over an eight-year period?

I think we figured that our period is a little bit less than eight years (multiple speakers) You know, between 5 and 7 years. That's not a rational way to go through that number.

Okay, great --

Alexander, let me just interrupt -- in terms of the share count, our share count and OP unit cap does for 2004 include the OP units that will be issued in connection with the purchase of the balance of Cherry Hill, as we explained back -- in terms of timing of that when we acquired Cherry Hill from the Rouse Company.

Right, that's what I was asking earlier, there's some additional shares that were going to come in the first quarter. But the 39 2 gives me sort of a rough round number.

(multiple speakers) in the second quarter.

That's in Q2 -- great. Can you just go over the run rates for G&A, management income, and interest expense and straight line for '04? Because in the fourth quarter, it obviously bumped up. Part of that is obviously seasonal, and another is maybe some one-time stuff -- but your expectations for those four line items?

I don't know that we're prepared to break those out individually and give predictions for each of those amounts.

Well, what about G&A? What are you expecting as a full-year number for that?

Why don't we take that question off-line?

Okay, and final question -- when do you see being able to come back to us on your capital plans for the renovations? And also, timing for redevelopment of the Echelon assets?

We just -- actually, I think Jon just went through it. We can go through it one more time. But our expectations based on a lease-by-lease analysis of the company was 25 million, including 10 million --

No, I understand that, but are you expecting hopefully by midyear, you'll be able to come back to us (multiple speakers)

It's our intention to come back to you each time we have an anchor deal to announce. So it's not that we intend to store them up and wait. I think we'll announce them as they occur and the associated capital costs. And if one of those transactions is sufficient enough to trigger a renovation projects or remodeling or expansion, we would discuss that at the time that we announce the anchor.

Okay. And then actually, I just noticed one final one. Can you give your thoughts on the pending lifestyle development for Lehigh Valley?

Joe Coradino is going to comment on that.

I think there's basically two developments that are being spoken about in the Lehigh Valley right now. One posing the queue (ph), and I forget the -- (multiple speakers)

Right, and then there's also the old Bethlehem Steel site.

Right, the old Bethlehem Steel site. I think that they are in progress. I'm not sure that either one is further enough along to -- particularly with anchor transactions. I mean, we've spoken to the various anchors. And they haven't committed to date. We also think that the final chapter hasn't been written on creating some kind of a lifestyle component at Lehigh Valley Mall. So I think there's another hat in the ring, so to speak, in that arena.

(OPERATOR INSTRUCTIONS) Michael Mueller, J.P. Morgan.

A couple of questions. First, thanks for the extra disclosure on the CapEx side. A question relating to that was the 10 million of renovations, I think it was categorized, or improvements -- is that TIs? Or is that other types or improvements?

Other types of improvements (multiple speakers) -- it's a wide range of physical improvements. (technical difficulty) classify that as recurring capital, so that's just (ph) the kind of improvements that we'll have every year.

Going back to the prior question, I know you were talking about giving some more information off-line on the FAS 141, 142, and the debt premium. But did I hear correctly -- were you saying that the five- to seven-year -- it was 140 million relating to FAS 141, 142 that's amortized over five to seven years. Is that correct?

Yes.

So that's really 50 to 70 cents worth a share of noncash income above the debt premium amortization. Is that the right way to think of that -- and the debt premiums amortization is 40-some cents?

That's correct. I mean, you have to look at the $140 million as being -- under the new accounting rules, it's a wasting asset. And actually, it resulted in the write-ups (ph) to the real estate investment line item on the balance sheet being significantly less than the acquisition cost of the new properties.

No, I mean, if we're trying to get to more of a cash FFO, if we're starting off the midpoint of the range being 3 70, the midpoint of the FAS 141 takes another 60 cents off of that. And that's before the debt premium amortization deduct (ph) -- correct?

Actually, it's split out, and part of it is not written back to FFO, and part of it would be written back to FFO, depending upon its -- the genesis of the intangible. If it's the above (ph) -- below-market rent, it's not an add-back --

How can we find out what that number is in terms of how much comes off for the noncash portion?

As we go forward, it will be the sloped (ph).

I mean, can you give us an idea of how much of that noncash income is cooked into the guidance of 3.60 to 3.80, or where the guidance is for '04?

Actually, we're not prepared to discuss it on the conference call, and to go through an in-depth discussion of the amortization of the intangibles. I don't want to get in the position of giving specific guidance on 10 different line items. We're comfortable giving the FFO range. But I'm not going to give particular cents per share -- you know, cents per (multiple speakers) 141, 142 (multiple speakers)

That's fine. It's just for other companies, I think, in your sector, the number has been a few cents per share and it just jumps out a little bit more (multiple speakers)

Yes, it jumps out (multiple speakers) because we made all those acquisitions. And anyone making a large acquisition now is going to have to take the -- is going to have to do the same intangible analysis. And as you can see from what is going on with us, it's going to be a fairly substantial number. If you look at it in the context of the size of the acquisition, it's substantial.

And last question -- just more specific to the Q1 guidance. The range is a little bit large. And I was just wondering, what are some of the factors that could swing between the high end and the low end of the range, considering we're halfway through the first quarter?

Well, when we give the guidance, we try to do it based on an allocation of the yearly plan. It's not meant to be a viewpoint backwards (ph) as to the actual results of the company in the first quarter. We're not pre-announcing our first quarter results. We're basing it off of the company's business plan for the year. So we're looking at it as if we're discussing the end of calendar year '03. And we're looking forward to the entire year. And we're really giving you our viewpoint of that yearly budgeting process. So the reason the range is so large is that it's our first year operating as a combined entity. And we're building in the fact that prior to this quarter, we only operated the company as a combined entity for investment (ph) REIT.

Gentlemen, it appears there are no further questions. I'll turn to call back over to you for any closing or additional remarks.

If there's no further questions, I want to thank you all for participating. I neglected to mention that we were happy to declare a 5.9 percent increase in our quarterly dividend, effective December 15, from 51 cents per share to 54 cents per share. On an annualized basis, our dividend will increase from $2.04 cents to $2.16 per common share.

And if there are no other questions, again, thank you, and we'll continue to keep you advised as events take place.

And that concludes today's conference call. Thank you for your participation. Have a good day.